Popular Technical Indicator Part I
Bollinger band are a volatility indicator. they consist of a simple moving average and 2 lines plotted at standard deviation on the both sides of central average line. the outer lines make up trend.
When the band is narrow, the market is range bond. when the band is wide the market is loud and is volatile.
We can use bollinger band is both ranging and volatile marker.
In a ranging market, look out for the Bollinger Bounce. The price tends to bounce from one side of the band to the other, always returning to the moving average. You can think of this like regression to the mean. The price naturally returns to the average as time passes.
In this situation, the bands act as dynamic support and resistance levels. If the price hits the top of the band, then place a sell order with a stop loss just above the band to protect against a break out. The price should revert back down towards the average, and maybe even to the bottom band, where you could take profits
When the market is trending, you can use the Bollinger Squeeze to time your trade entry and catch breakouts early on. When the bands get closer together (i.e. they squeeze), it indicates that a breakout is about to happen. It doesn’t tell you anything about direction so be prepared for the price to go either way.
If the candles breakout below the bottom band, the move will generally continue in a downtrend.
If the candles breakout above the top band, the move will generally continue in an uptrend.
Relative Strength Index (RSI)
This is a momentum indicator plotted on a separate scale. There’s a single line scaled from 0 to 100 that identifies overbought and oversold conditions in the market. Readings over 70 indicate an overbought market, and readings below 30 indicate an oversold market.
The whole idea behind RSI is to pick the tops and bottoms, to get into a market as the trend is reversing. This can help you to take advantage of the whole move.
Moving Average Convergence Divergence (MACD)
This is a trend indicator and it consists of a fast line, slow line, and a histogram.
The inputs for this indicator are a faster-moving average (MA-fast), a slower-moving average (MA-slow), and a number defining the period for yet another moving average (MA-period).
The MACD fast line is a moving of the moving average of the difference between MA-fast and MA-slow.The MACD slow line is a moving average of the MACD fast line. The number of periods is defined by MA-period.
Say you have MACD “12, 26, 9” (a common default setting). This means that the fast line is the moving average of the difference between the 12-period and 26-period moving averages. The slow line is a 9-period moving average of the MACD fast line. And the histogram is the difference between the MACD lines.
You might have to re-read that a few times to get it. And make sure you do get it because MACD is a very useful indicator.
So what’s this “convergence divergence” thing all about? Well, the moving averages and the histogram are plotted on a separate chart and you’ll see that the lines crossover from time to time.
As the difference between the 2 lines gets smaller, they get closer together, i.e. converge. When the difference gets bigger, they get further apart, i.e. diverge.
It’s this characteristic of the indicator that you can use in trading.
When a new trend is forming, the MACD lines will converge, eventually they’ll crossover (indicating that the trend has reversed), and the lines then start to diverge. At the point of crossover, the histogram will disappear because the difference between the lines is 0.